Iraq’s first long term energy strategy launched in Baghdad June 12, is national in its dimension and impact and integrated in its coverage of all aspects of energy production and usage. The Integrated National Energy Strategy (INES), made up of a set of national policy objectives for the country and backed by a plan for the required policy (investment) commitments, infrastructure developments and institutional reforms, has been adopted by the Iraqi council of ministers in April. This was followed in May by an order issued by the prime minister to all ministries to follow the road map traced by the document in their planning and policies.
The fact today, stated by the strategy report and known to everyone, is that despite having oil and gas reserves that rank among the world’s largest, yet the infrastructure needed to take advantage of these resources is in disrepair, industries that depend on these resources are virtually non-existent, and Iraq’s electric power system is chronically unable to meet demand. The strategy offers a plan that aims at reversing this deterioration.
The big test now is whether Iraqi ministries can really work according to a shared agenda to achieve the long term vision and strategic objectives set by INES. More importantly, would they see an interest in carrying out the institutional reforms which INES says without which Iraq cannot move forward on any of those fronts.
The exercise, championed by former oil minister and current chairman of the Prime Minister’s Advisory Commission (PMAC) Thamir Ghadhban (See Interview), with technical and financial help of the World Bank, took almost two years to complete. The government of Iraq allocated $1.6 million on top of $6.2 million provided by the World Bank, which allowed for the contracting of international consultants Booz & Company, selected in a tender, to work under guidance of a steering committee of government officials from the concerned ministries and chaired by Ghadhban himself.
The lynchpin for the long term strategy is naturally oil production with all its uncertainties when it comes to long term projections to 2030 and bey ond. Hence, for planning purposes, three oil and gas production scenarios (high, medium and low) were developed, but the medium profile scenario was adopted in all analysis and recommendations given the benefits associated with it compared to the other two.
Based on this scenario, the key objectives for the short term to end of 2014 are to ramp up oil production to at least 4.5 million b/d and 5 million b/d of export capacity, eliminate the gas flaring, meet the power demand by making available 22 GW of power capacity including 70% of electricity produced by natural gas and boosting the cement, steel, urea and brick industries. Critical to this phase is facilitation of development (including water injection projects and the evacuation network) of five major oil fields: Rumaila, West Qurna 1&2, Majnoon and Zubair which together constitute 75% of incremental production.
In the medium term (2016-2025), the strategy prioritizes the development of gas-based industries, achieving energy security, diversifying the economy and creating jobs. Oil production peak or plateau of about 9 million b/d should be reached by 2020 with at least 10.5 million b/d of overall oil export capacity. This phase should see the ramp up of non-associated gas to around 20% of total gas produced in order to create a sustainable gas export position of some 2-3 bcfd. Available power capacity should reach 29 GW by 2016 and refining capacity 1.4 million b/d between 2016 and 2019.
Beyond 2025, Iraq’s key objective according to the strategy will be to build a strong export position in natural gas, refined products and gas-based industries and even power.
The strategy takes the view that since most of the future incremental crude will be generated from heavy oil reservoirs or fields, crude production should be segregated in up to 5 grades by adding three new heavy grades to the current Kirkuk and Basrah light grades, spread geographically: south heavy, central heavy and north heavy with the latter two destined for domestic use. In parallel, it recommends, the northern evacuation system should be expanded to 3.75 million b/d by 2017 while the southern export system should be expanded to an overall capacity of 6.8 million b/d by 2014. In between, a link north-south made up of a number of pipelines should be available by 2017 with the capacity to move 3.15 million b/d.
Most importantly, the strategy introduces the concept of drawing up an oil policy that is based on an integrated analysis of reserves; reservoir characteristics; production cost and economics; and domestic and global markets. Such an analysis would allow the ministry of oil to set optimal production target levels, segregate crudes and manage the different grades, define reserves to production ratio requirements and prioritize development locations.
When it comes to refined products, the strategy expects Iraq to cover gasoil and gasoline demand- currently in big deficiency – in the medium term based on current oil ministry refining plans which include the building of four new refineries in various provinces. However, a large-scale 300,000 b/d export oriented refinery located in Basrah close to export terminals would add value to crude oil by processing heavier crudes and yielding higher middle distillates and lower fuel oil in line with international demand, the strategy recommends.
The major implication of implementing this integrated strategy is the requirement of about $620 billion in investments till 2030, a big chunk of which will be dedicated to capital expenditures and payments to IOCs. These investments would generate about $6 trillion of revenues to the government, mostly (85%) from oil exports based on the medium oil production scenario. Even at low oil prices of say $50/bbl, the energy sector would still provide immediate and growing positive cash flow to the state, the strategy predicts, bearing a temporary fiscal deficit in the short term. But the cumulative surplus from oil revenues over the 2013-2030 period would amount to about $2 trillion.
The economic or oil price risk associated with INES is minimal compared to the implementation risks of INES itself. “INES calls for infrastructure build-up at a pace well beyond anything that Iraq has managed before now”, it states in the summary of the report. It must overcome logistics bottlenecks, resource constraints, and institutional limitations to coordinate and manage multiple major initiatives, while it also must design and plan a long-term structure for sector governance capable of achieving the long-term INES vision.
The short term is the point of critical risk, it admits. “Objectives are front-loaded into this period, but institutions have little running room to build the capabilities needed. For that, an oversight framework at the highest levels of government is required to ensure that the right economic and managerial resources are applied to these immediate needs, and that appropriate coordination occurs among ministries”.
The solution proposed is that INES should be owned by the executive branch of the government through the prime minister’s office that will approve strategic decisions and allocate budgets. The legislative branch represented by the Council of Representatives and its dedicated committees will monitor the implementation of INES and support the government in its responsibilities.